Endo International PLC (ENDP) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the third quarter 2010 Endo Pharmaceuticals earnings conference call. My name is Fab and I'll be your coordinator for today. At this time, all participants are in listen only mode. We will conduct a question and answer session towards the end of today's conference. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr Blaine Davis, Vice President, Corporate Affairs. Please proceed.

Thanks and good morning everyone. Thank you for joining us today. With me on today's call are Dave Holveck, President and CEO of Endo, Julie McHugh, Chief Operating Officer, Dr Ivan Gergel, Executive Vice President of R&D and Alan Levin, Executive Vice President and Chief Financial Officer. After our brief prepared remarks, we'll open the call to your questions.

I would like to remind you that any forward-looking statements by management are covered under the Private Securities Litigation Reform Act of 1995 and subject to change, risks and uncertainties described in today's press release and in our filings with the SEC. In addition, during the course of this call we may refer to non-GAAP financial measures that are not prepared in accordance with accounting principles generally accepted in the United States and that may be different from non-GAAP financial measures used by other companies.

Investors are encouraged to review Endo's current report on Form 8-K filed with the SEC for Endo's reasons for including those non-GAAP financial measures in its earnings announcement. The reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures is contained in our sales and earnings press release issued earlier this morning. With that, I'd like to turn the call over to Dave.

Thank you, Blaine. Good morning, everyone. I'm pleased to report that Endo had another great quarter with revenues and earnings from our three core areas of branded pharmaceuticals, generics, and devices and services. Revenues were up 23% over last year, with branded drug sales up 8% and generics up 20%. We also had important new contributions from sales of HealthTronics devices and services. The results were in line with our expectations and keep us on track to achieve our financial guidance for 2010.

But beyond the numbers, which Alan will review, the third quarter marked major progress towards the transformation we launched more than two years ago when we set out to adapt to changes in the healthcare environment by leveraging our core competencies to diversify and grow our business. Our recent acquisition of Penwest strengthened our core pain business by giving us additional flexibility and profitability in our opioid franchise. The acquisition of HealthTronics, which we completed in July, has added new devices and services to the urology franchise which we acquired from Indevus. And the addition of Qualitest, which we announced in late September, gives us critical mass in generics and makes Endo the sixth largest US generic manufacturer.

Qualitest also strengthens our core pain franchise. Since 90% of all pain prescriptions are filled by generics and more than 40% of Qualitest sales comes from pain products. It also accelerates our growth with more than $400 million in additional revenues and $0.40 in additional earnings next year after the deal closes. As a result of this activity, we are now a much stronger company, a more flexible company, and better able to manage the life cycle of our products from branded to generics.

Our focus on organic growth has also allowed us to invest more strategically in R&D. As a result, we've launched new research collaborations in devices and branded pharmaceuticals, explored new applications of promising drug delivery technology and advanced several late stage product candidates towards FDA approval. Ivan will give you an update on this activity in a moment.

While our search for new products and technology is ongoing and we will continue to pursue new business opportunities, we also have a lot to digest. Our main focus right now is on integrating HealthTronics, Penwest, and soon Qualitest into our organization and maximizing their opportunities for growth and success. I'm confident that we have the talent, the products, the technology, and the financial strength to continue to build our business and are excited about what we can achieve in the future.

Now, I'll turn the call over to Julie for an update on our commercial operations and our plans for new products. Julie?

Thanks, Dave. Our commercial team is preparing for two product launches and pursuing an exciting life cycle management opportunity for our second largest branded pharmaceutical. I'll begin with Fortesta, which has a PDUFA date of December 30. We believe Fortesta will be an important therapeutic option for patients with low testosterone.

Fortesta has a number of potential advantages over other testosterone gels in terms of dosing and convenience, and we're excited about the opportunity to differentiate it from current testosterone products. We are currently developing strategies and investing in promotional and sales rep support to address the competition and facilitate managed care access to Fortesta.

This market is growing, but still vastly underserved. Only a small percentage of the 14 million men with low T in the United States are being treated today. For all of these reasons, we believe Fortesta will be a very successful product. If the feedback from the FDA is positive, we plan to launch Fortesta during the first half of 2011, utilizing both our urology and primary care physician sales teams.

Our second product pending approval is our long acting Oxymorphone designed to be crush resistant, which has a PDUFA date of January 7. Like Fortesta, we are excited about the potential launch of this product in the first half of 2011 pending the outcome of FDA's review. Our commercial team is preparing all the necessary marketing materials and programs to support the launch and the entire Endo pain solution sales team will have responsibility for the product. This new formulation is designed to help address the misuse and abuse of opioids. It also represents an important life cycle management opportunity for long acting Oxymorphone, and we look forward to implementing promotional strategies and directing new promotional support toward this drug upon approval.

Last quarter we spoke about our efforts to restructure our sales force and I'm pleased to report that this work has been implemented and we are now operating more efficiently in the field. We reshaped our pain solutions sales force by combining sales groups and we redesigned territories to increase access and demand. The end result is a more efficient sales model that assigns responsibility for all physicians in a territory to a single sales representative.

We also extended our relationship with our contract sales organization to maximize our sales efforts. These changes have made our sales force more efficient, more flexible, more accountable, and a better partner with our customers. Last quarter I spoke about a shortfall in VALSTAR's supply due to rising product demand and manufacturing issues . I'm pleased to report that we issued a letter to healthcare practitioners in September with the positive news that the product is back up to full supply and we are no longer limiting prescriptions to patients who had already begun therapy.

I'll conclude my prepared remarks with a quick update on HealthTronics, which is performing extremely well, and making significant revenue contributions to our commercial business. The combination of our urology products with pathology services and devices to treat prostate cancer, BPH, and kidney stones has increased our access to urologists and expanded our presence in the urology space. The HealthTronics business continues to grow nicely and keeps Endo on the path to become the premier provider of care in urology.

Now, I'll turn the call over to Ivan for an update on R&D activities.

Thanks, Julie. We continue to make good progress in our early and late stage R&D programs, but much of our recent activity has focused on regulatory support for products pending approval. For example, in our testosterone replacement franchise, we are currently awaiting the FDA's response to the Fortesta marketing application. The PDUFA date for FDA action is December 30 and, as Julie indicated, if all goes well, we plan to launch Fortesta during the first half of 2011. While it remains early, we are encouraged by the acceptance of our submission and are working with the FDA on the NDA.

We're also awaiting FDA action on our NDA for long acting crush resistant Oxymorphone, which received priority review status in September and has a PDUFA date of January 7, 2011. On December 2, we have been invited to a joint meeting of FDA's anesthetic drugs and risk management advisory committees to discuss our NDA. Confirmation of that meeting should appear in the federal register notice today. We had expected to be invited to an advisory committee meeting in this regard and have been preparing to present since the acceptance of the NDA.

As a final note, we plan to begin enrolling patients in the next study of Urocidin in refractory bladder cancer during the fourth quarter. This will serve as a registration trial comparing Urocidin to Mitomycin, the current standard treatment for this condition. Urocidin is a novel treatment for bladder cancer and reflects our committment to this therapeutic area. I'm pleased with our clinical progress and look forward to resolving our marketing applications that are pending before the FDA.

Now I'll turn the call over to Alan for his financial review. Alan?

Thank you, Ivan. Endo had a strong third quarter and first nine months of the year, and as Dave discussed earlier, we made major progress through our business development activities during the third quarter. The end result is a more diversified business that's positioned for stronger future growth. I'd like to start this morning by highlighting the potential for growth that we've created for Endo and outline our financial guidance for 2011.

Next year, we expect total revenues of between $2.2 billion and $2.3 billion, or more than 30% growth versus our current guidance range for 2010 revenues. We estimate adjusted diluted earnings per share in a range of $4.15 to $ 4.25, and reported our GAAP diluted earnings per share are expected to be within a range of $2.05 to $2.15.

Our guidance reflects a number of assumptions. Importantly, we assume that the Qualitest transaction will close later this year or in early 2011. Regulatory approval is assumed to support first half product launches for both Fortesta and our new formulation of long acting Oxymorphone, designed to be crush-resistant. Additionally, we believe our expected revenue range is wide enough to consider the potential effects of generic competition as early as the first quarter of 2011 for Voltaren Gel.

As a reminder, Voltaren Gel reached the end of its marketing exclusivity period in October of this year. A generic competitor has not yet emerged. However, we believe that if or when one does, potentially in 2011, we have the necessary infrastructure flexibility as well as the ability to launch a generic, such that the net effects of these scenarios fit within our EPS ranges as well. Finally, in terms of revenue assumptions, we believe that in 2011 Lidoderm will produce low single digit percentage growth through a combination of prescription growth and modest price increases, and will account for less than 40% of our anticipated revenues.

Regarding our expense structure and the business additions that we've made in 2010, Endo is now a significantly more complex business, but one that is better positioned for sustainable growth. However, this produces a number of important measures important to modeling our business, around which I'd like to provide some color. On an adjusted basis, we expect our corporate gross margin as a percentage of revenues to be approximately 70% next year. With a full impact from this years acquisitions, adjusted SG&A will grow by approximately 20% versus projections for full year 2010. However, as a percentage of revenues, SG&A will decline modestly.

Similarly, the addition of Qualitest is the primary driver for an anticipated increase in total R&D expenses of nearly 30% on an adjusted basis. However, as a percentage of revenues, R&D will decrease modestly as well. Non-controlling, or minority interest payments, to our equity partners in Lithotripsy, laser and cryo partnerships that are core components of the HealthTronics business, will continue at run rates similar to the $15 million per quarter that we outlined for the second half of 2010. In total for 2011, we assume approximately $60 million of these distributions.

We anticipate an adjusted effective tax rate of approximately 30% after taking into account non-controlling interest expense and cash tax savings from NOLs, as well as other tax attributes from our pending acquisition of Qualitest Pharmaceuticals. Our share count assumption takes into account normal levels of dilution resulting from the Company's equity compensation arrangements. And finally, capital expenditures will increase with the addition of HealthTronics and Qualitest. In total we expect capital expenditures of approximately $85 million to $90 million, with Qualitest related investments driving approximately a third of that total.

As we discussed during the announcement of our acquisition of Qualitest, we believe that this level of CapEx investment will help to substantially improve operating efficiencies within our generics business. I look forward to updating you on our progress toward achieving those objectives and I'll now turn to the review of our latest results.

For the third quarter of 2010, we had total revenue of $444 million, up 23% over the third quarter of 2009. For the nine months ended September 30, 2010, we had total revenue of $1.205 billion, up 13% over the same period of 2009. Lidoderm, our lidocaine patch indicated for the treatment of the pain of post-herpetic neuralgia, had a solid quarter. We continue to expect low single digit growth for this franchise in 2010.

On an adjusted basis, gross margin was down consistent with our expectations by 4.8% to 74.5% of revenue, versus 79.3% during the third quarter of 2009. The decline is driven by a combination of the addition of HealthTronics this quarter with its relatively lower gross margins, along with the year-over-year increase in the royalty rate on sales of Opana ER.

For the nine months ended September 30, 2010, adjusted gross margin declined to 76.8% of revenue, versus 79.4% during the same period of 2009. We continue to believe that for the full year adjusted gross margin, as a percentage of total revenues for the consolidated Endo Pharmaceuticals, will decrease by about three percentage points relative to 2009.

Total reported operating expenses for the quarter were $194 million. However, on an adjusted basis, total operating expenses for the quarter were $162 million. This total comprises selling, general and administrative expenses of $131 million, and R&D expenses of $31 million. Together, these items declined 3% versus prior year adjusted total operating expenses of $166 million.

Total reported operating expenses for the first nine months of 2010 were $554 million. However, on an adjusted basis, total operating expenses for the first nine months of 2010 were $474 million. This total comprises selling, general and administrative expenses of $389 million and R&D expenses of $86 million. Together, these items increased 3% versus the adjusted total operating expenses of $462 million during the first nine months of 2009, with growth driven primarily by incremental investments in R&D to advance our pipeline projects.

Third quarter adjusted net income was $101 million, up 36% over $74 million during the third quarter of 2009. Our reported diluted earnings per share increased to $0.46 versus $0.42 in the third quarter of 2009. On an adjusted basis, adjusted diluted EPS increased 37% to $0.86 versus $0.63 in the third quarter of 2009. For the nine months ended September 30, adjusted net income was $283 million, up 18% over $239 million during the same period of 2009. Our reported diluted earnings per share increased to $1.42 versus $1.01 in the first nine months of 2009.

On an adjusted basis, adjusted diluted EPS increased 18% to $2.41 per share versus $2.04 per share in the first nine months of 2009. Our adjusted effective tax rate for the third quarter of 2010 was 30.5% and benefited year-over-year, primarily from a reduction in certain state income tax liabilities. For the first nine months of 2010, our adjusted effective tax rate was about 32% and we continue to expect our adjusted effective tax rate to be between 32% and 33% for the full year.

Looking to our balance sheet, as a result of our acquisition of Qualitest, we intend to use existing cash on hand and to incur up to $400 million of term loans, as well as drawdown $300 million from our revolving credit facility to finance the acquisition. We are also evaluating opportunities in the debt markets to further optimize our capital structure.

During the third quarter of 2010, Endo notified the holders of its 16% non-convertible non-recourse notes of the Company's intent to exercise its option to redeem the $57 million of remaining principal, outstanding at 108%, for approximately $62 million, excluding accrued and unpaid interest on November 5, 2010. Accordingly, we've reclassified the remaining carrying value of the non-recourse notes of approximately $62 million to a current liability in our condensed consolidated balance sheet as of September 30, 2010.

During the third quarter, Endo repurchased $9 million of its stock and on a year-to-date basis, that total now stands at approximately $59 million. As we've said previously, we believe that the magnitude of additional share repurchases will continue to be determined by the scope and pace of business development activity.

Overall, we had a strong third quarter, with our base business on track to generate about $400 million of cash flow from operations this year. We'll continue to evaluate appropriate uses of that cash flow including reinvestment in organic growth, additional business development activity, and the optimization of the Company's capital structure.

This concludes my prepared remarks. Now I'll turn the call over to Blaine.

Thanks, Alan. We're done with the prepared remarks section, so I'd now like to turn the call back to the Operator for the question and answer.

Thank you.

(Operator Instructions)

Your first question will come from the line of Shibani Malhotra from RBC Capital.

Hi, congrats on a good quarter and thanks for taking my question. I've got two. The first one is for you, Dave. Given the filing for Opana ER, clearly your stock has performed very well with investor expectations that this will be approved and will have maintained the franchise, but I'd just like to get your take on the abuse deterrent market and how you see this playing out? And what your expectations are in terms of whether you will even be able to keep the old OxyContin or generics for OxyContin off the market? And then I have a separate question on Voltaren.

Okay, well thank you and thank you for the question. I think the first part of your question, we as an industry have a responsibility to look after, again, not only the quality of our products but also the effectiveness in the use of those products, and I think that the tamper resistant formulation is a step in that direction. I think relative to other elements of abuse and misuse, aggressive REMS programs have been also initiated and elements of that are certainly and have been a part of our product.

Going forward, I suspect that we'll continue to evolve, putting a more systems approach into how we administer, prescribe and follow-up on prescriptions relative to abuse, but at this point, I think we're supportive of this next step. I think relative to where the agency is going to be in terms of approval, I never try to handicap that aspect of it. I'm very happy that we're able to be able to go to the Board and be a considered opportunity for a quick approval, or review I should say and go from there. As for other elements in terms of our business growth, we have now more opportunities for growth and this is certainly one of them, one that could only be critically measured in a short-term, but it's only one of many.

Okay, and then just my follow-up question is on Voltaren. I guess for Alan or Blaine. There is a chance that you could see a generic for Voltaren Gel, but when I calculate the impact that would have on earnings, it's almost negligible given the profitability for the drug and the -- what you pay out to Novartis, et cetera. So, could you comment on that? I agree that you might see some downside on revenues, but is it fair to assume this does not impact your earnings guidance?

Well, Shibani, we don't comment on product specific profitability per se, but having said that, the guidance ranges that we've provided for both revenues as well as EPS contemplate a range of scenarios with regard to the possibility of genericization. Certainly, there would be an impact on the top line although we would have the ability to launch an authorized generic for the drug, but there's also tremendous flexibility in our cost structure that would enable us to dial down resources more rapidly if we saw genericization appear. And so we're able to contain any impact within the EPS guidance that we provided.

Okay, thanks very much.

Thanks, Shibani. Can we go to the next question?

Your next question will come from the line of John Boris from Citi Investment Research.

Thanks for taking the questions. First one is for Ivan, just directed on the crush resistant Opana ER. Can you just comment on the pharmacokinetic profile of the crush resistant technology product and how that contrasts with that of the current formulation that you market? Will it be deemed therapeutically equivalent? And then, secondly for Julie on the life cycle strategy, can you just walk us through or help us understand as you're currently selling Opana ER and preparing to launch the abuse, or crush resistant technology, is this a shift strategy in both trying to attempt to shift all of it over by pulling the NDA or is it more of the sales force having to pull it by leaving the current product on the market going forward? Thanks.

Yes, John, hi, thanks, it's Ivan. So, the crush resistant formulation is actually bioequivalent, the approach we took is a bioequivalent approach. It will be submitted as a new NDA, but it's a bioequivalent and it's obviously difficult in some of its physical characteristics, that being that it's much more difficult to crush and it's designed to be that way, designed to be a sort of hopefully abuse deterrent.

Hi, John. It's Julie. Thank you for your question. With respect to our intentions on Opana ER following approval of the crush resistant formulation of Opana or Oxymorphone, we're obviously interested in having a conversation with the FDA before commenting definitively on how we would move forward with Opana ER following the approval. However, we are prepared if required to remove Opana ER from the market and I can tell you that our full promotional effort will be behind the new formulation upon approval.

Hello?

Okay, thank you.

Thanks, John. Can we go to the next question please?

Your next question will come from the line of Corey Davis from Jefferies.

Thanks very much. Just a couple questions. First probably for Ivan. At the recent FDA Ad Com, they went through a list of three different types of studies that companies are required to do for these new abuse deterrent formulations, in vitro studies, PK studies and the likability studies. So, can you just walk us through each of those even if at only a high level to make sure that you've checked all of the boxes needed for approval of this product in a timely manner?

Yes, Corey. Thanks for the question. Certainly we adhered very closely to the guidelines, we work closely with the division. So, yes, we've absolutely undertaken in vitro studies and PK studies, and some likability studies as well.

And at the time of the panel are you planning to offer your plan for epidemiological studies or is that something that just comes up in the post-marketing setting?

Well certainly, we are considering, I think there will be discussion about REMS and I think there will be in sort of the context of the meeting that went on a couple weeks back now, certainly that's been helpful to us as we consider sort of preparing preparations for the meeting. And we certainly will be prepared to discuss both our own proposed REMS, as well as potential epidemiological type studies going forward.

And then last question, I'm not sure whose best to answer it, but how do you feel you are right now positioned with managed care and both Opana and Lidoderm in terms of appropriate tier 2 coverage and what that means for kind of the continued growth? I'm thinking mostly of Opana given how great the growth looks right now, the sustainability of that growth in like the 25% to 30% year-over-year range.

Well, Corey, this is Julie. I think we're in a very solid position with managed care on both Opana and Lidoderm. We believe our access, we enjoy incredibly favorable access that's a result of the actions of our managed care team, but also our contracting strategy. So, I believe that the contracting managed care situation is very solid and we can continue to see low digit, low single digit growth on Lidoderm is what we're anticipating going forward and with Opana, we should be able to sustain the types of growth that we've seen historically on the brand.

Great. Thanks very much everyone.

Your next question comes from Marc Goodman from UBS.

Yes, can you talk about HealthTronics a little bit, the different aspects of the business and what grew, what didn't grow, what's doing as well as expected and how you think about that business for next year? Thanks.

Sure, Marc it's Alan here. We had about $52 million of revenues from HealthTronics this quarter. About half of that was in the Lithotripsy business, which is really the single largest component within that business as well, followed by prostate therapies which are laser and cryotherapies. The business itself is performing very consistently with our expectations at the time of acquisition. We continue to see attractive growth opportunities that can help turbo charge the growth trajectory of the business as we go out into the latter part of 2010 and into 2011. Certainly, some of that involves use of our balance sheet to build out the Lithotripsy business further.

In about 30% of those cases we tend to see follow on opportunities in either the laser or the cryo businesses as well, and we've had a very good pilot that is going on now where some of our UEO reps have been cross-trained in the pathology services and we're beginning to see some uptake in sales as a result of that. So, the business is performing consistent with our expectations and we expect that it will be a meaningful contributor to our earnings going forward.

Thanks.

Your next question will come from the line of Rich Silver from Barclays Capital.

Alan, just on your last point about still seeing the opportunities to "turbo charge" the business. That we assume would be above and beyond your current guidance, is that correct?

We, as a general rule, do not include business development opportunities in the guidance that we provide, and so anything that we do on the acquisition side would be over and above the guidance we provided today.

Okay, and just so I understand, what was the 30% figure you were referring to?

In the case of the Lithotripsy business, about 30% of the partnerships that are involved in Lithotripsy have follow on opportunities to put in place a partnership for laser therapy or for cryo ablation therapy. So, the way we think about Lithotripsy is it's an enabling component that produces attractive earnings and cash flow for us, but it also allows us to further expand upon other parts of the HealthTronics device model.

Okay, and then on the high end of your revenue guidance range, I understand that you generally don't provide any specifics, but can you give us some sense of what that at least might assume vis-a-vis the TRF formulation of Oxymorphone? As far as the switching, as well as switching plus growth or switching plus growth and maybe higher growth than would be assumed without the launch?

I think it would be premature for us to expand beyond the $2.2 billion to $2.3 billion range that we provided. Clearly, we have two products pending from the FDA and we've also got the Qualitest transaction pending, so we've tried to provide some flexibility within that guidance depending on a variety of regulatory outcomes, as well as the timing of the close of that transaction and it would be premature to comment further at this point.

Okay, thanks very much.

Thank you.

Your next question will come from the line of Gregg Gilbert from Banc of America Merrill Lynch.

Thanks. I have a few. First for Julie, obviously the market has become more confident in the duration of the Opana franchise, but it's been nice to see the share pick up nicely of late as well. Can you attribute that to any factor or factors in particular and how sustainable those factors may be?

Sure, Gregg. What we've seen over the course of the past few months is a shift away from OxyContin to both Morphine and Oxymorphone. We're not entirely sure what's behind that share shift other than we continue to vigorously promote Opana.

It is a brand that is represented by our 650 person pain solution sales organization and is a very important component of their responsibility. So, we have seen some shifting, some competitive share shifting away from OxyContin and we have some thoughts about that, but I'd rather not speculate as to what's behind that shift.

Okay, and then for Ivan, can you provide any updates on AVEED as well as the recently completed Urocidin study? And my last question is for anyone that is willing to take it, can you confirm whether or not you have any ongoing investments on Lidoderm life cycle management? Thanks.

Yes, so, on AVEED, as you know we met with FDA earlier this year. We are still considering the outcome of that meeting. We still are very much committed to AVEED. We believe it has a significant place to play in the world of testosterone replacement therapy. The other one, the Urocidin study, the Phase III study that was just completed, we are finalizing some of the data review, but we hopefully will be able to release data for that quite shortly, from that study quite shortly.

Thanks and life cycle management for Lidoderm? Any ongoing investments?

We continue to consider potential life cycle investments around that. We have -- we also are looking potentially at different type of patch going forward.

Thank you.

Your next question will come from the line of Annabel Samimy from Stifel Nicolaus.

Hi, thanks for taking my call. Just a couple follow-up questions on HealthTronics. You'd mentioned that for the pathology and diagnostics you'd be able to leverage your sales force. To what extent is expansion of that business within guidance and do you think this is going to be something that we see starting next year or just over time over the medium to longer term?

Well, as Alan mentioned, we have been putting a subset of our urology sales organization behind promotion of the pathology services business and we are evaluating the effectiveness of that. I can tell you anecdotally, the feedback has been very positive in terms of generating new business leads for that business. Now we do see currently the lab solutions business as a relatively small component of the overall HealthTronics revenue stream, but we do anticipate that going forward it will be one of the faster growing pieces and we are intense on capturing our share of that $1.8 billion market.

Just to that point, Annabel, we have Incorporated growth assumptions as part of our guidance in that regard.

Okay, and how do you manage that sales force in terms of expanding their product offering to pathology and diagnostics when you're launching a new product in the whole urology segment? Are you going to be organizing it with sales force a little bit differently or are you leveraging the same sales force? Can you help us understand the sort of strategy around that launch?

So, with respect to Fortesta, the organizations that will be selling Fortesta, our sales organizations include our urology, endocrinology and our primary care organizations, so that's how we will be launching Fortesta. With respect to the place where the pathology business will fall in terms of the overall call responsibilities is still to be determined.

We're in the process of evaluating the co-promote that we put in place this Summer and assuming that we get a good return on that investment and again, I believe that we will, we'll look at our portfolio and develop sales deployment strategies consistent with what is best for maximizing the overall sales and profitability of our business.

Okay. In terms of some of the data releases that you're going to have, I think we're expecting something for Octreotide and I guess the coming months. Can you just talk about some of the timing of the data releases that you'll be having in the next few months?

Certainly, as we said earlier, we have just completed enrollment into the Octreotide Acromegaly study, so we hopefully will have results from that study in the first part of next year and if that is successful, we could potentially be looking at an NDA submission for Octreotide and Acromegaly in some point in the previous part of 2011. And we've also spoken previously about our [casinol] program with Octreotide, and once again, that Phase II program is well under way at this point.

We're running a couple of cohorts because we're looking into the most appropriate dose for that program and once again, that program is well under way and we hopefully will have some results for that around the middle of 2011 too.

If I may, one more question. The Opana, I'm sorry, the TRF for Oxymorphone in the Ad Com coming up, is there anything specifically they are expecting will come up in the Ad Com outside of REMS in epidemiological studies?

Once again, I think we've obviously been doing a lot of preparation for that. We're excited about our new crush resistant formulation. Our expectation is that this advisory committee will run in a similar fashion to prior advisory committees. Certainly, we're absolutely will be prepared to discuss REMS programs and potential epidemiological studies. We've followed with great interest the recent meeting and certainly that's something we're now considering in greater detail.

Okay, thank you.

Thank you.

Your next question will come from the line of Irina Rivkind from Duncan-Williams.

Hi. Thanks for taking the call. I just had some more questions around HealthTronics and the warning letter. Have the issues identified been resolved? I know there was a quality systems improvement plan and I was just wondering if you've gotten any close out or resolution to these issues?

Thank you for your call, I mean your question. Yes, first of all, I'd like to just remind you that this warning letter did not result in the disruption in the sales of the Endo care business. We did receive a warning letter of the FDA, but I would also mention that two weeks after receiving that warning letter HealthTronics announced the 510K clearance for their Cryocare CF surgical system, which basically addressed a significant portion of the issues raised in the FDA warning letter.

In addition, we've added significant resources to the quality assurance team in Austin to help support HealthTronics going forward and all of the outstanding issues have been addressed in a corrective and preventive action plan, or a CAPA, and we reviewed all of those items in a recent meeting with the FDA. So, we consider that the letter and the issues raised in the letter have largely been resolved and now are focused on continuing to develop the business and support it with all of the quality assurance resources necessary.

Okay, and then I just have a separate question. [Scenargo], the negotiation period ends in December and we still haven't seen anything on that. Can you provide us with an update?

Yes, this is Dave Holveck. While I think at this point, we've assessed the technology and at this point, I think relative to contractual negotiations -- unless something changes more so on the regulatory front, this particular opportunity may come to pass as one that doesn't fit our particular profile of needs. So it is one that we have great promise for, but again there are some regulatory impediments that at this point haven't been cleared up.

Okay, thank you very much.

Your next question will come from the line of Louise Chen from Collins Stewart.

Hi, just a few questions. First question is can you provide an update on Axomadol and the new market opportunity for that drug?

Well, certainly. We've got two large Phase 2b studies underway with Axomadol at this point. We're working closely with our partner Grunenthal, the two studies. One is a study in chronic low back pain.

The other study is in diabetic neuropathic pain. The low back pain is doing extremely well with recruitment and we should have some results from that around the middle of 2011. The diabetic study is recruiting slightly slower than that. Axomadol is interesting clearly because its got a sort of novel dual mechanism of action in the pain space, but clearly, we will wait until we have the results in the middle of next year before we can make sort of definitive statements regarding it.

Okay, and the second question is just are you still expecting $500 million of sales in your generics business with the acquisition of Qualitest for next year in 2011?

Yes, we're still, Louise, we're still tracking to the guidance that we had previously provided, $400 million of which is from the Qualitest business, so $500 million is for the combined legacy Endo plus Qualitest.

And last question is just on Lidoderm. We've seen it in the patch space, some generics have had difficulty replicating the brand product. I'm just wondering with respect to Lidoderm, do you believe it's difficult to formulate product and why would you think that?

We do think that it's a difficult to formulate product and I think sometimes some people underestimate the higher barriers to entry associated with the manufacturing complexity, certainly when we've seen other patch technologies we've seen fewer competitors in that space.

And certainly, it's the drug, the sort of guidances released by the FDA are very complex, but clearly for Lidoderm specifically, our belief is that anyone would need to undertake clinical efficacy bioequivalence study because clearly this is a topical product and it's a very distinct label. So, someone trying to sort of a generic for Lidoderm would need to undergo sort of clinical efficacy studies.

Thank you.

Your next question will come from the line of Gary Nachman from Susquehanna Financial Group.

Hi, good morning. First just a follow-up on the 2011 revenue guidance for generics. Could you just review a little bit more for us roughly how many generic approvals are factored into the guidance, how are you risk adjusting for those opportunities and maybe just qualitatively? I know it's not going to be quantitatively.

Yes, so the total guidance for generics is about $500 million of revenues, a combination of the Endo legacy business coupled with the Qualitest business. That's part of a 15% CAGR in the combined generics business growth over the 2011-2012 time frame. The combined Qualitest plus Endo will have 46 ANDAs under review in multiple therapeutic areas including pain, urology, CNS, and others. Endo has 16 under active review by the FDA. Qualitest has 30 that are currently under active review and we had filed 10 ANDAs last year, Qualitest four, so there's a pretty robust portfolio.

We're expecting about 20 approvals over the 2011-2012 time frame. We do not risk adjust. We do risk adjust for the product launches so that's been factored into our guidance as well. And the nature of the evolution of new product revenues is that market share tends to evolve over several years and so it's not just new products that could be approved next year. But it's also products that were approved this year or last year that will drive some of that growth and helps to give us the confidence we have behind those numbers.

Okay, and just another way to ask it in a worst case scenario, I don't think it's going to happen, but if you don't get any of those approvals can you still hit the bottom end of your guidance range or do you need some approvals to come through to get into the guidance range?

I think we always look at a range of scenarios in our guidance ranges. We've got three -- we're building out our business on three legs of a stool, the branded pharmaceutical space, the generics and the device and services. There will always be upside opportunities and downside opportunities in each of those segments, so we remain confident that under a variety of scenarios we'll be able to achieve the guidance that we provided today.

Okay, and then just a couple more. VANTAS and SUPPRELIN LA were a little light I thought in the quarter relative to my numbers. Is there seasonality with those products or was there any reversals of inventory? They had been doing extremely well the last few quarters. I just want to make sure they are both on positive run rates going forward.

Yes. Well, with respect to, let me take VANTAS first. VANTAS, there was a change in Medicare reimbursement, used to be a provision called the least costly alternative which required physicians to use the least expensive otherwise therapeutically substitutable product, and that was reversed in the second quarter of this year which put VANTAS at a disadvantage from a reimbursement point of view. We've taken some actions to address that and we believe the product will be back to a competitive position some time next year.

With regard to SUPPRELIN, SUPPRELIN LA was up 36% the three months for the quarter. It continues to perform very well and the recent slight slowdown in prescription volume I think is a result of some modest seasonality, but we do expect that SUPPRELIN will continue to be a nice growth driver for us in the future.

Okay, and then just quickly, for Alan. The tax rate, 30% in 2011. Is that something that could potentially improve even further down the road? I know that's probably a good number for next year, but just when we think of the future years if there's some other levers in there potentially. Thanks.

Well, it's a very good question. We're always looking at opportunities to be more and more efficient and we'll continue to explore tax planning opportunities. Some of the reductions in the cash taxes paid by the Company are a function of tax attributes as part of our strategic activities, net operating losses and other tax attributes that we acquire. So as the Company continues to build out both organically and through external opportunities, I suspect that we will continue to see opportunities in that space that we will capitalize on.

Okay, thank you.

Your next question will come from the line of Chris Schott from JPMorgan.

Great. Thanks. Just a couple here. First, on the business development side, you've done a number of deals over a relatively short period of time. I think you mentioned that we should anticipate a digestion period as you create some of these businesses into your overall organization.

Can you just give us a time frame along that? Is that a quarter or two processor something longer? And when I think about future business development when you think of your franchises at this point, where do you see the most opportunity for future business development at this point and just one quick follow-up from there.

Sure. I think relative to your comment, it is about execution and integration at this point, from a standpoint of timing. It's probably a quarter, if we see the plans that we've laid out executed in a proper way. I think relative to other elements in terms of BD, we have I guess a continuous stream of areas and opportunities that we look at.

I don't think there's any one that is exclusive focus, but strategically, when you look at the organic side, the generic and the device and service, all of which are at various levels of growth and able to be expanded. I think the organic growth side is one that I continually want to see us execute against and Ivan has made comments there, and I think there's opportunities to continue to build that for long term sustainable growth. And then certainly, in the other segments of our business, the service device area focus more specifically in the urology and that also has I think areas where with the HealthTronics acquisition, we can enhance and build out that channel.

And then with some of the changes you're making to your sales force in anticipation of the Opana TR introduction as well as some of your restructuring efforts with the CSO, can you just remind us again your anticipated sales force structure, sales force size and rough detailing kind of priorities in pain as we think about 2011?

Sure. In our pain solution sales organization, we have a total of 650 representatives, 220 of which are contract sales organization reps. In our urology, endocrinology, oncology sales organization, we have approximately 70 reps calling on urologists and approximately 25 reps calling on pediatric endocrinologists.

We would anticipate, as I mentioned before, that with respect to Opana and the new crush resistant formulation, that the full 650 pain solution sales representatives will be supporting that product launch. In addition, they will also be supporting the Fortesta launch in addition to the urology and endocrinology reps supporting that approval as well.

Thanks and just one final question. On Opana, is there any hurdles that you are aware of that would preclude you from withdrawing the current version of Opana from the market if the new formulation were approved?

We could certainly -- could withdraw Opana from the market if the new version was approved.

Thanks very much.

Thanks, Chris. And just in the interest of time, I think we have the opportunity to take about two more questions.

The next question will come from the line of Greg Waterman from Goldman Sachs.

Great. Thanks for taking the question. Just quickly, I was hoping you could provide a little more color on some of the specific drivers of spending guidance and to the extent you can, qualitatively or quantitatively, just kind of the underlying trend versus acquisition related spend and also the impact of health reform.

Sure, so with regard to key line items in our P&L and spending guidance. First with regard to gross margin, the addition of HealthTronics and Qualitest carry lower gross margins relative to our branded pharmaceuticals business and so that is part of the way we think about the 70% gross margin guidance that we've guided to. That is partially offset by the impact of the Penwest acquisition which removed the 22% royalty on net sales of Opana ER, and so that particular line item has been somewhat complicated by multiple transactions this year that have annualization effects.

With regard to SG&A, you see the addition of HealthTronics, Penwest and Qualitest that are all part of the year-over-year increase in SG&A of about 20% which we've guided. Obviously there's an annualized effect for both HealthTronics, as well Penwest, as part of that, and Qualitest you've got the full year versus essentially nothing in 2010 in that regard. We do expect SG&A to decline modestly year-over-year and this is consistent with the way we think about running our business for increased efficiency and effectiveness, optimizing the return on the investments we've made. Next year will be the fourth consecutive year of declines in OpEx as a percentage of revenues, which kind of talks to the strength and resiliency of our business.

On the R&D side, you've got, again, the acquisitions that drive 30% uptick in R&D, but you've also got the continued advancement of our own products through the pipeline and in particular, the Qualitest R&D efforts to continue to generate and prosecute ANDAs, as well as our own internal efforts on the legacy Endo generics business. All of that is factored in there. We expect R&D, as a percentage of revenues, to decline modestly again next year, although clearly the uptick in the rate of growth there is reflective of the way we think about continuing to invest in R&D over the medium term to grow our business organically.

With respect to healthcare reform, you might recall that we estimated approximately $20 million worth of impact in 2010 due primarily to changes in Medicaid fee-for-service and managed Medicaid. We do anticipate there will be incremental effects from healthcare reform in 2011, in particular, the provisions that is targeted to reducing the size of the doughnut hole in Medicare Part D, as well as the healthcare reform fee. We expect that the incremental effects of those two components will be less than $20 million and we are assuming approximately $35 million in total effects in 2011.

Great. Thank you.

Can we have the last question, please?

And your last question will come from the line of David Buck from Buckingham Research.

Yes, thanks for taking the question. Just to ask the crush resistant Opana question a different way, I guess for Ivan and/or Dave, the opioid category -- I don't think we've seen a first pass approval in the last few years. Can you talk about what you think you've learned from the delays previously and what you think the agency maybe most concerned about and how you address that?

Secondly, on the potential for 2013 having just your own product on the market without generics taking off the old product, can you talk about what royalty might be due to IMPAX labs as a result of the settlement? And can you talk about, for Alan, just the tax rate in the quarter was about 27.6%, if I look at the adjusted rate. Can you just go into why that was and it sounds like that was more of a one-time tax rate? Thanks.

So, David, it's Ivan and I'll take the first part of your question. Clearly there's been a huge amount of activity from an FDA advisory committee standpoint over the last few years. We've obviously worked very, very closely with the division and certainly, we've followed the guidelines that have evolved over that period from a sort of development standpoint and what you need to do to get a crush resistant formulation approved. Clearly, there's a lot of interest in the type of REMS programs that are to be undertaken and also the follow on epidemiology type studies and that was obviously the basis for the recent meeting.

All of these areas are areas where we are focusing a lot on. We're doing everything we can to address what we believe are both the divisions of FDA, as well as the advisory committee believe are important. So, I think the team here has done a great amount of work to prepare for this meeting and we look forward to meeting with the advisory committee and the division on December 2.

And with regard to your questions, David, for 2013 and royalty rates, there are actually no contractual obligations to IMPAX on a royalty basis. IMPAX is a smart sophisticated company so you should assume that they properly protected themselves in the agreement in other ways, but there are no royalty rates specifically.

With regard to the tax rate for the quarter, I think there are a couple of things that drive the reduction year-over-year. First, there are some efficiencies in state tax liabilities that are playing out throughout the year and there's a year-over-year effect that really began in Q4 of last year.

Secondly, net operating losses for the Company have been straight lined over in terms of their impact over the quarter, so as income before taxes is subject to some degree of variation. You'll see some variation quarter to quarter in the effective tax rate and of course, the acquisition of HealthTronics this quarter carried with it some incremental NOLs that you're seeing for the first time in our P&L. So, net-net that's what drives the quarter-over-quarter reduction.

Okay, thank you.

Okay, well I appreciate again the following, the support and interest. I think as we look into going forward, it's all about execution and that's been sort of the hallmark of this transformation we've been putting Endo through. I think the outlook in to '11 is very much supportive of this transformation, which has brought branded and organic growth to generics, as well as device and services into play.

I think having a multiple element to be able to build around and build off of gives us a platform for strong and sustainable growth. On that I think it again is a very, very strong Company. We look forward to continued updates and bringing forth the type of growth that I think you, the shareholders, expect and on that I'll close out. Thank you very much.

Thank you all for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a wonderful day.